Tracking Health Care Costs: Spending Growth Slowdown Stalls in First Half of 2004

Originally published by the Center for Studying Health System Change (HSC) as Issue Brief No. 91, December 2004. This analysis was conducted with funding from The Employee Benefit Research Institute (EBRI).

Health Care Spending Growth Slowdown Stalls in Early 2004

The recent slowdown in health care spending growth stalled in the first half of 2004, as health care costs per privately insured American increased 7.5 percent, virtually the same rate as in 2003. Private-sector spending on health care accounted for more than half of all health spending, and both private and public sectors were subject to similar cost pressures.

Hospital inpatient spending growth slowed to 5.1 percent in the first half of 2004, while outpatient spending held steady at 11.4 percent. With hospital utilization continuing to grow at a slow rate for the second consecutive year, price increases of 7.7 percent accounted for the bulk of the hospital spending increase. Prescription drug spending rose 8.8 percent, similar to 2003 rates and well below the peak increase of 19.5 percent in the second half of 1999.

Costs Outpacing Worker Income

The cost of employer-sponsored health insurance continued to rise at double-digit rates in 2004, far outstripping growth in workers' incomes. This state of affairs had elevated health care affordability to near the top of the domestic policy agenda in the presidential campaign. Employers responded by shifting more costs to workers through higher patient cost sharing, while U.S. Census Bureau data showed the number of uninsured Americans reaching 45 million in 2003, or almost 18 percent of the nonelderly population.

The analysis concluded that unless strong measures were taken to address the high rate of health care spending growth, relief from rapidly rising premiums was unlikely. Health care costs were projected to continue growing faster than worker incomes for the foreseeable future, which would lead to greater numbers of uninsured Americans and increase the urgency for policy makers to either initiate effective cost-containment strategies or accept the trajectory of rapidly growing costs accompanied by shrinking coverage.

Spending Components and Trends

The stabilization of cost growth at a high level rather than continued deceleration reflected several factors. Hospital price increases were the primary contributor, driven by the concentrated market power that many hospital systems had accumulated through consolidation. Outpatient spending continued to grow rapidly as services shifted from inpatient to outpatient settings, and the growth of specialty pharmaceuticals was emerging as a new cost pressure even as traditional prescription drug spending growth moderated.

Sources and Further Reading

Strunk, Bradley C., and Paul B. Ginsburg, "Tracking Health Care Costs: Spending Growth Slowdown Stalls in First Half of 2004," Issue Brief No. 91, Center for Studying Health System Change (December 2004).